Take Action to Correct Bad Financial Statements, part 2 of 2

Last month I gave you the seven
dead giveaways that your financial
statements are wrong. Now
I’ll tell you how to fix them.

1. Negative cash.
Unless you regularly bounce checks,
you’ll always have a positive balance in
your checking account — even if it is a
penny. If you see negative cash on your
balance sheet, go into your bookkeeper’s
office. Look for checks that have been
printed and are waiting for your signature.
Do not allow any more checks to
be printed without money in the bank to
cover the checks!
Your balance sheet must be accurate.
With negative cash and inaccurate accounts
payable, you can’t make good
business decisions.

2. Even inventory value or inventory
that doesn’t change from month to
month.
This shows that you aren’t accounting
for material expenses properly.
Remember that inventory is a bet. You
bet your hard-earned cash that when you
buy something, you will be able to sell it.
Go to your warehouse to see what types
of bets you’ve made in the past. When
inventory doesn’t change from month to
month, you have no clue as to what your
true material expenses are.

This means
that your margins may or may not be
accurate.
Your financial software program
should have a job-costing module. It
should also have a purchase-order system
to track what you buy that

goes
into inventory and what goes directly to
material expense (i.e., the materials are
bought for a job). Use it!

When a service technician uses a part
on a job, he can get it from the supply
house or take it off his truck. If he goes
to the supply house, he should have a
purchase-order number to record on the
invoice. If he takes a part off his truck,
he writes a “T” on his invoice next to the
part so that the office knows that it came
from his truck inventory.

3. A balance sheet that doesn’t
balance.
Fire your bookkeeper. I’m not kidding.
This is one of the basic rules of
accounting that all bookkeepers should
know. If this happens, your books are
totally wrong and need to be corrected.
I’ve known one situation in more than
25 years that there was a legitimate reason
for a balance sheet not balancing (The bookkeeper had stolen from the
company, and they were accounting for
it. She was fired and sent to jail).

If you have a balance sheet that
doesn’t balance, look at your computer
system set up and see if it allows “one
legged entries.” If so, then someone can
put in a debit without a credit or an unbalanced
entry. This is usually how the
balance sheet doesn’t balance. Put in
the command to not allow “one legged
entries.”

4. Negative taxes payable.
This is a situation where your bookkeeper
has made wrong entries when accounting
for your payroll tax payments.
This one is not necessarily a fireable offense
but does require training in payroll
processing.

There are two components to FICA
taxes — a segment that the employee
pays, and a segment that the employer
pays. The segment that the employer
pays is an expense to the business. The
segment that the employee pays is deducted
from his pay and owed to the
government along with the company
segment of FICA. When these payments
are recorded properly, you don’t have
negative taxes payable.

5. No rent or extremely high
overhead expenses.
This is a laziness situation. For most
of us, overhead expenses such as rent are
paid every month. If you don’t see a rent
expense each month, that is just sloppy
bookkeeping. Your bookkeeper should
ensure that all overhead expenses are
recorded in the correct month. Just because
you didn’t pay your rent doesn’t
mean that you didn’t have the expense!

6. Negative loan balances.
This usually is the same issue as negative
cash. Your bookkeeper has recorded
loan payments incorrectly. The only
portion of the payment that should go
on the balance sheet is the principal repayment.
The interest you pay is an expense
to the company and goes on the
profit-and-loss statement.

7. Inconsistent gross margins.
I’ve seen gross margins go from 70%
to 5% — and even go negative in the
same few months. This is an “apples
and oranges” issue; but, again one of
sloppy bookkeeping. When you have a
sale, you must post the expenses against
that sale in the same month. Otherwise,
your gross margin varies widely.

Don’t
close a month without making sure all of
the revenue and direct expense for that
revenue are in the same month. This is
the only way you can have peace of mind
knowing that your jobs are being installed
as they were bid.

Your bookkeeper is responsible for
giving you accurate financial statements.
Find another bookkeeper if these seven
issues are happening frequently.

Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and become more profitable. She is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. Ruth has written two books: The Ugly Truth About Small Business and The Ugly Truth About Managing People. Contact Ruth at ruthking@hvacchannel.tv or 770.729.0258.

Articles by Ruth King

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Prevent Employee Embezzlement, Part 3

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